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Chapter 9
Profit Planning
Solutions to Questions
9-1 A budget is a detailed quantitative plan
for the acquisition and use of financial and other
resources over a given time period. Budgetary
control involves using budgets to increase the
likelihood that all parts of an organization are
working together to achieve the goals set down
in the planning stage.
9-2
1. Budgets communicate management’s
plans throughout the organization.
2. Budgets force managers to think about
and plan for the future. In the absence of the
necessity to prepare a budget, many managers
would spend all of their time dealing with day-to-
day emergencies.
3. The budgeting process provides a means
of allocating resources to those parts of the
organization where they can be used most
effectively.
4. The budgeting process can uncover
potential bottlenecks before they occur.
5. Budgets coordinate the activities of the
entire organization by integrating the plans of its
various parts. Budgeting helps to ensure that
everyone in the organization is pulling in the
same direction.
6. Budgets define goals and objectives that
can serve as benchmarks for evaluating
subsequent performance.
9-3 Responsibility accounting is a system in
which a manager is held responsible for those
items of revenues and costs—and only those
items—that the manager can control to a
significant extent. Each line item in the budget is
made the responsibility of a manager who is
then held responsible for differences between
budgeted and actual results.
9-4 A master budget represents a summary
of all of management’s plans and goals for the
future, and outlines the way in which these plans
are to be accomplished. The master budget is
composed of a number of smaller, specific
budgets encompassing sales, production, raw
materials, direct labor, manufacturing overhead,
selling and administrative expenses, and
inventories. The master budget usually also
contains a budgeted income statement,
budgeted balance sheet, and cash budget.
9-5 The level of sales impacts virtually every
other aspect of the firm’s activities. It determines
the production budget, cash collections, cash
disbursements, and selling and administrative
budget that in turn determine the cash budget
and budgeted income statement and balance
sheet.
9-6 No. Planning and control are different,
although related, concepts. Planning involves
developing goals and developing budgets to
achieve those goals. Control, by contrast,
involves the means by which management
attempts to ensure that the goals set down at
the planning stage are attained.
9-7 The flow of budgeting information
moves in two directions—upward and
downward. The initial flow should be from the
bottom of the organization upward. Each person
having responsibility over revenues or costs
should prepare the budget data against which
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 9 187

his or her subsequent performance will be
measured. As the budget data are
communicated upward, higher-level managers
should review the budgets for consistency with
the overall goals of the organization and the
plans of other units in the organization. Any
issues should be resolved in discussions
between the individuals who prepared the
budgets and their managers.
All levels of an organization should
participate in the budgeting process—not just
top management or the accounting department.
Generally, the lower levels will be more familiar
with detailed, day-to-day operating data, and for
this reason will have primary responsibility for
developing the specifics in the budget. Top
levels of management should have a better
perspective concerning the company’s strategy.
9-8 A self-imposed budget is one in which
persons with responsibility over cost control
prepare their own budgets. This is in contrast to
a budget that is imposed from above. The major
advantages of a self-imposed budget are: (1)
Individuals at all levels of the organization are
recognized as members of the team whose
views and judgments are valued. (2) Budget
estimates prepared by front-line managers are
often more accurate and reliable than estimates
prepared by top managers who have less
intimate knowledge of markets and day-to-day
operations. (3) Motivation is generally higher
when individuals participate in setting their own
goals than when the goals are imposed from
above. Self-imposed budgets create
commitment. (4) A manager who is not able to
meet a budget that has been imposed from
above can always say that the budget was
unrealistic and impossible to meet. With a self-
imposed budget, this excuse is not available.
Self-imposed budgets do carry with
them the risk of budgetary slack. The budgets
prepared by lower-level managers should be
carefully reviewed to prevent too much slack.
9-9 The direct labor budget and other
budgets can be used to forecast workforce
staffing needs. Careful planning can help a
company avoid erratic hiring and laying off of
employees.
9-10 The principal purpose of the cash
budget is NOT to see how much cash the
company will have in the bank at the end of the
year. Although this is one of the purposes of the
cash budget, the principal purpose is to provide
information on probable cash needs during the
budget period, so that bank loans and other
sources of financing can be anticipated and
arranged well in advance.
188 Managerial Accounting, 13th Edition

Exercise 9-1 (20 minutes)
1. April May June Total
February sales:
$230,000 × 10%......... $ 23,000 $ 23,000
March sales: $260,000
× 70%, 10%................ 182,000 $ 26,000 208,000
April sales: $300,000 ×
20%, 70%, 10%.......... 60,000 210,000 $ 30,000 300,000
May sales: $500,000 ×
20%, 70%................... 100,000 350,000 450,000
June sales: $200,000 ×
20%............................. 40,000 40,000
Total cash collections..... $265,000 $336,000 $420,000 $1,021,000
Observe that even though sales peak in May, cash collections peak in
June. This occurs because the bulk of the company’s customers pay in
the month following sale. The lag in collections that this creates is even
more pronounced in some companies. Indeed, it is not unusual for a
company to have the least cash available in the months when sales are
greatest.
2. Accounts receivable at June 30:
From May sales: $500,000 × 10%.......................... $ 50,000
From June sales: $200,000 × (70% + 10%)............ 160,000
Total accounts receivable at June 30...................... $210,000

April May June Quarter
Budgeted sales in units............. 50,000 75,000 90,000 215,000
Add desired ending inventory*.. 7,500 9,000 8,000 8,000
Total needs................................ 57,500 84,000 98,000 223,000
Less beginning inventory.......... 5,000 7,500 9,000 5,000
Required production.................. 52,500 76,500 89,000 218,000
*10% of the following month’s sales in units.

Year 2 Year 3
First Second Third Fourth First
Required production in bottles....................... 60,000 90,000 150,000 100,000 70,000
Number of grams per bottle........................... × 3 × 3 × 3 × 3 × 3
Total production needs—grams..................... 180,000 270,000 450,000 300,000 210,000
Year 2
First Second Third Fourth Year
Production needs—grams (above)................ 180,000 270,000 450,000 300,000 1,200,000
Add desired ending inventory—grams........... 54,000 90,000 60,000 42,000 42,000
Total needs—grams....................................... 234,000 360,000 510,000 342,000 1,242,000
Less beginning inventory—grams.................. 36,000 54,000 90,000 60,000 36,000
Raw materials to be purchased—grams........ 198,000 306,000 420,000 282,000 1,206,000
Cost of raw materials to be purchased
at 150 roubles per kilogram......................... 29,700 45,900 63,000 42,300 180,900

1. Assuming that the direct labor workforce is adjusted each quarter, the direct labor budget is:
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Units to be produced......................................... 8,000 6,500 7,000 7,500 29,000
Direct labor time per unit (hours)....................... × 0.35 × 0.35 × 0.35 × 0.35 × 0.35
Total direct labor-hours needed......................... 2,800 2,275 2,450 2,625 10,150
Direct labor cost per hour.................................. × $12.00 × $12.00 × $12.00 × $12.00 × $12.00
Total direct labor cost........................................ $ 33,600 $ 27,300 $ 29,400 $ 31,500 $121,800
2. Assuming that the direct labor workforce is not adjusted each quarter and that overtime wages are
paid, the direct labor budget is:
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Units to be produced........................................ 8,000 6,500 7,000 7,500
Direct labor time per unit (hours)...................... × 0.35 × 0.35 × 0.35 × 0.35
Total direct labor-hours needed....................... 2,800 2,275 2,450 2,625
Regular hours paid........................................... 2,600 2,600 2,600 2,600
Overtime hours paid......................................... 200 0 0 25
Wages for regular hours (@ $12.00 per hour). $31,200 $31,200 $31,200 $31,200 $124,800
Overtime wages (@ 1.5 × $12.00 per hour)..... 3,600 0 0 450 4,050
Total direct labor cost....................................... $34,800 $31,200 $31,200 $31,650 $128,850

1. Yuvwell Corporation
Manufacturing Overhead Budget
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Budgeted direct labor-hours................................... 8,000 8,200 8,500 7,800 32,500
Variable overhead rate........................................... × $3.25 × $3.25 × $3.25 × $3.25 × $3.25
Variable manufacturing overhead.......................... $26,000 $26,650 $27,625 $25,350 $105,625
Fixed manufacturing overhead.............................. 48,000 48,000 48,000 48,000 192,000
Total manufacturing overhead............................... 74,000 74,650 75,625 73,350 297,625
Less depreciation................................................... 16,000 16,000 16,000 16,000 64,000
Cash disbursements for manufacturing overhead. $58,000 $58,650 $59,625 $57,350 $233,625
2. Total budgeted manufacturing overhead for the year (a).... $297,625
Total budgeted direct labor-hours for the year (b)............... 32,500
Manufacturing overhead rate for the year (a) ÷ (b)............. $ 9.16

Weller Company
Selling and Administrative Expense Budget
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Budgeted unit sales.............................................. 15,000 16,000 14,000 13,000 58,000
Variable selling and administrative expense per
unit..................................................................... × $2.50 × $2.50 × $2.50 × $2.50 × $2.50
Variable expense.................................................. $ 37,500 $ 40,000 $ 35,000 $ 32,500 $145,000
Fixed selling and administrative expenses:
Advertising......................................................... 8,000 8,000 8,000 8,000 32,000
Executive salaries.............................................. 35,000 35,000 35,000 35,000 140,000
Insurance........................................................... 5,000 5,000 10,000
Property taxes.................................................... 8,000 8,000
Depreciation....................................................... 20,000 20,000 20,000 20,000 80,000
Total fixed expense............................................... 68,000 71,000 68,000 63,000 270,000
Total selling and administrative expenses............ 105,500 111,000 103,000 95,500 415,000
Less depreciation.................................................. 20,000 20,000 20,000 20,000 80,000
Cash disbursements for selling and
administrative expenses..................................... $ 85,500 $ 91,000 $ 83,000 $ 75,500 $335,000

Garden Depot
Cash Budget
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Cash balance,
beginning................... $ 20,000 $ 10,000 $ 35,800 $ 25,800 $ 20,000
Total cash receipts....... 180,000 330,000 210,000 230,000 950,000
Total cash available..... 200,000 340,000 245,800 255,800 970,000
Less total cash
disbursements........... 260,000 230,000 220,000 240,000 950,000
Excess (deficiency) of
cash available over
disbursements........... (60,000) 110,000 25,800 15,800 20,000
Financing:
Borrowings (at
beginnings of
quarters)*................ 70,000 70,000
Repayments (at ends
of quarters)............. (70,000) (70,000)
Interest§
..................... (4,200) (4,200)
Total financing.............. 70,000 (74,200) (4,200)
Cash balance, ending. . $ 10,000 $ 35,800 $ 25,800 $ 15,800 $ 15,800
* Since the deficiency of cash available over disbursements is $60,000,
the company must borrow $70,000 to maintain the desired ending cash
balance of $10,000.
§
$70,000 × 3% × 2 = $4,200.

Gig Harbor Boating
Budgeted Income Statement
Sales (460 units × $1,950 per unit)......................... $897,000
Cost of goods sold (460 units × $1,575 per unit)..... 724,500
Gross margin........................................................... 172,500
Selling and administrative expenses*...................... 139,500
Net operating income.............................................. 33,000
Interest expense...................................................... 14,000
Net income.............................................................. $ 19,000
* (460 units × $75 per unit) + $105,000 = $139,500.

Mecca Copy
Budgeted Balance Sheet
Assets
Current assets:
Cash*.................................................... $12,200
Accounts receivable............................. 8,100
Supplies inventory................................ 3,200
Total current assets................................. $23,500
Plant and equipment:
Equipment............................................ 34,000
Accumulated depreciation.................... (16,000)
Plant and equipment, net........................ 18,000
Total assets............................................. $41,500
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................. $ 1,800
Stockholders' equity:
Common stock..................................... $ 5,000
Retained earnings#.............................. 34,700
Total stockholders' equity........................ 39,700
Total liabilities and stockholders' equity. . $41,500
* Plug figure.
# Retained earnings, beginning balance. $28,000
Add net income..................................... 11,500
39,500
Deduct dividends.................................. 4,800
Retained earnings, ending balance...... $34,700

Quarter (000 omitted)
1 2 3 4 Year
Cash balance, beginning............................... $ 6 * $ 5 $ 5 $ 5 $ 6
Add collections from customers..................... 65 70 96 * 92 323 *
Total cash available........................................ 71 * 75 101 97 329
Less disbursements:
Purchase of inventory................................. 35 * 45 * 48 35 * 163
Selling and administrative expenses........... 28 30 * 30 * 25 113 *
Equipment purchases................................. 8 * 8 * 10 * 10 36 *
Dividends.................................................... 2 * 2 * 2 * 2 * 8
Total disbursements....................................... 73 85 * 90 72 320
Excess (deficiency) of cash available over
disbursements............................................. (2)* (10) 11 * 25 9
Financing:
Borrowings.................................................. 7 15 * 0 0 22
Repayments (including interest).................. 0 0 (6) (17)* (23)
Total financing................................................ 7 15 (6) (17) (1)
Cash balance, ending.................................... $ 5 $ 5 $ 5 $ 8 $ 8
*Given.

1. Gaeber Industries
Production Budget
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Budgeted unit sales................. 8,000 7,000 6,000 7,000 28,000
Add desired ending inventory.. 1,400 1,200 1,400 1,700 1,700
Total units needed................... 9,400 8,200 7,400 8,700 29,700
Less beginning inventory........ 1,600 1,400 1,200 1,400 1,600
Required production................ 7,800 6,800 6,200 7,300 28,100

Exercise 9-11 (continued)
2. Gaeber Industries
Direct Materials Budget
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Required production............................ 7,800 6,800 6,200 7,300 28,100
Raw materials per unit......................... × 2 × 2 × 2 × 2 × 2
Production needs................................. 15,600 13,600 12,400 14,600 56,200
Add desired ending inventory.............. 2,720 2,480 2,920 3,140 3,140
Total needs.......................................... 18,320 16,080 15,320 17,740 59,340
Less beginning inventory..................... 3,120 2,720 2,480 2,920 3,120
Raw materials to be purchased........... 15,200 13,360 12,840 14,820 56,220
Cost of raw materials to be purchased
at $4.00 per pound............................ $60,800 $53,440 $51,360 $59,280 $224,880
Schedule of Expected Cash Disbursements for Materials
Accounts payable, beginning balance. $14,820 $ 14,820
1st Quarter purchases......................... 45,600 $15,200 60,800
2nd Quarter purchases........................ 40,080 $13,360 53,440
3rd Quarter purchases......................... 38,520 $12,840 51,360
4th Quarter purchases......................... 44,460 44,460
Total cash disbursements for
materials........................................... $60,420 $55,280 $51,880 $57,300 $224,880

1. Jessi Corporation
Sales Budget
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Selling price per unit................ × $18.00 × $18.00 × $18.00 × $18.00 × $18.00
Total sales............................... $198,000 $216,000 $252,000 $234,000 $900,000
Schedule of Expected Cash Collections
Accounts receivable,
beginning balance................ $ 70,200 $ 70,200
1st
Quarter sales...................... 128,700 $ 59,400 188,100
2nd
Quarter sales..................... 140,400 $ 64,800 205,200
3rd
Quarter sales...................... 163,800 $ 75,600 239,400
4th
Quarter sales...................... 152,100 152,100
Total cash collections.............. $198,900 $199,800 $228,600 $227,700 $855,000

2. Jessi Corporation
Production Budget
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Add desired ending inventory.. 1,800 2,100 1,950 1,850 1,850
Total units needed................... 12,800 14,100 15,950 14,850 51,850
Less beginning inventory........ 1,650 1,800 2,100 1,950 1,650
Required production................ 11,150 12,300 13,850 12,900 50,200

1. Hareston Company
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Required production................................ 7,000 8,000 6,000 5,000 26,000
Raw materials per unit............................. × 2 × 2 × 2 × 2 × 2
Production needs.................................... 14,000 16,000 12,000 10,000 52,000
Add desired ending inventory.................. 1,600 1,200 1,000 1,500 1,500
Total needs............................................. 15,600 17,200 13,000 11,500 53,500
Less beginning inventory......................... 1,400 1,600 1,200 1,000 1,400
Raw materials to be purchased............... 14,200 15,600 11,800 10,500 52,100
Cost of raw materials to be purchased at
$1.40 per pound................................... $19,880 $21,840 $16,520 $14,700 $72,940
Accounts payable, beginning balance..... $ 2,940 $ 2,940
1st Quarter purchases............................. 15,904 $ 3,976 19,880
2nd Quarter purchases............................ 17,472 $ 4,368 21,840
3rd Quarter purchases............................ 13,216 $ 3,304 16,520
4th Quarter purchases............................. 11,760 11,760
Total cash disbursements for materials... $18,844 $21,448 $17,584 $15,064 $72,940

2. Hareston Company
Direct Labor Budget
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Units to be produced............................ 7,000 8,000 6,000 5,000 26,000
Direct labor time per unit (hours)......... × 0.60 × 0.60 × 0.60 × 0.60 × 0.60
Total direct labor-hours needed...........
4,200 4,800 3,600 3,000 15,600
Direct labor cost per hour.................... × $14.00 × $14.00 × $14.00 × $14.00 × $14.00
Total direct labor cost.......................... $ 58,800 $ 67,200 $ 50,400 $ 42,000 $218,400

1. Raredon Corporation
Direct Labor Budget
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Units to be produced............................ 12,000 14,000 13,000 11,000 50,000
Direct labor time per unit (hours)......... × 0.70 × 0.70 × 0.70 × 0.70 × 0.70
Total direct labor-hours needed........... 8,400 9,800 9,100 7,700 35,000
Direct labor cost per hour.................... × $10.50 × $10.50 × $10.50 × $10.50 × $10.50
Total direct labor cost.......................... $ 88,200 $102,900 $ 95,550 $ 80,850 $367,500
2. Raredon Corporation
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter Year
Budgeted direct labor-hours................ 8,400 9,800 9,100 7,700 35,000
Variable overhead rate........................ × $1.50 × $1.50 × $1.50 × $1.50 × $1.50
Variable manufacturing overhead........ $12,600 $14,700 $13,650 $11,550 $ 52,500
Fixed manufacturing overhead............ 80,000 80,000 80,000 80,000 320,000
Total manufacturing overhead............. 92,600 94,700 93,650 91,550 372,500
Less depreciation................................. 22,000 22,000 22,000 22,000 88,000
Cash disbursements for
manufacturing overhead................... $70,600 $72,700 $71,650 $69,550 $284,500

Problem 9-15 (45 minutes)
1. Production budget:
July August
Septem-
ber October
Budgeted sales (units)............ 35,000 40,000 50,000 30,000
Add desired ending inventory. 11,000 13,000 9,000 7,000
Total needs............................. 46,000 53,000 59,000 37,000
Less beginning inventory........ 10,000 11,000 13,000 9,000
Required production............... 36,000 42,000 46,000 28,000
2. During July and August the company is building inventories in
anticipation of peak sales in September. Therefore, production exceeds
sales during these months. In September and October inventories are
being reduced in anticipation of a decrease in sales during the last
months of the year. Therefore, production is less than sales during these
months to cut back on inventory levels.
3. Direct materials budget:
July August
Septem-
ber
Third
Quarter
Required production (units).... 36,000 42,000 46,000 124,000
Material H300 needed per unit × 3 cc × 3 cc × 3 cc × 3 cc
Production needs (cc)............. 108,000 126,000 138,000 372,000
Add desired ending inventory
(cc)....................................... 63,000 69,000 42,000 * 42,000
Total material H300 needs...... 171,000 195,000 180,000 414,000
Less beginning inventory (cc). 54,000 63,000 69,000 54,000
Material H300 purchases (cc). 117,000 132,000 111,000 360,000
* 28,000 units (October production) × 3 cc per unit = 84,000 cc;
84,000 cc × 1/2 = 42,000 cc.
As shown in part (1), production is greatest in September; however, as
shown in the raw material purchases budget, purchases of materials are
greatest a month earlier—in August. The reason for the large purchases
of materials in August is that the materials must be on hand to support
the heavy production scheduled for September.

1.
1
.
1
.
Hruska Corporation
Direct Labor Budget
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
Units to be produced..................... 12,000 10,000 13,000 14,000 49,000
Direct labor time per unit (hours)... 0.2 0.2 0.2 0.2 0.2
Total direct labor-hours needed..... 2,400 2,000 2,600 2,800 9,800
Direct labor cost per hour.............. $12.00 $12.00 $12.00 $12.00 $12.00
Total direct labor cost.................... $28,800 $24,000 $31,200 $33,600 $117,600
2.
1
.
1
.
Hruska Corporation
Budgeted direct labor-hours.......... 2,400 2,000 2,600 2,800 9,800
Variable overhead rate.................. $1.75 $1.75 $1.75 $1.75 $1.75
Variable manufacturing overhead.. $ 4,200 $ 3,500 $ 4,550 $ 4,900 $ 17,150
Fixed manufacturing overhead...... 86,000 86,000 86,000 86,000 344,000

Total manufacturing overhead....... 90,200 89,500 90,550 90,900 361,150
Less depreciation.......................... 23,000 23,000 23,000 23,000 92,000
Cash disbursements for
manufacturing overhead............. $67,200 $66,500 $67,550 $67,900 $269,150

1. December cash sales.................................... $ 83,000
Collections on account:
October sales: $400,000 × 18%.................. 72,000
November sales: $525,000 × 60%.............. 315,000
December sales: $600,000 × 20%.............. 120,000
Total cash collections.................................. $590,000
2. Payments to suppliers:
November purchases (accounts payable)... $161,000
December purchases: $280,000 × 30%...... 84,000
Total cash payments................................... $245,000
3. Ashton Company
Cash Budget
For the Month of December
Cash balance, beginning.................................. $ 40,000
Add cash receipts: Collections from customers 590,000
Total cash available before current financing.... 630,000
Less disbursements:
Payments to suppliers for inventory............... $245,000
Selling and administrative expenses*............ 380,000
New web server............................................. 76,000
Dividends paid............................................... 9,000
Total disbursements.......................................... 710,000
Excess (deficiency) of cash available over
disbursements................................................ (80,000)
Financing:
Borrowings..................................................... 100,000
Repayments................................................... 0
Interest........................................................... 0
Total financing................................................... 100,000
Cash balance, ending....................................... $ 20,000
*$430,000 – $50,000 = $380,000.

1.
1
.
Zan Corporation
Required production (units)........... 5,000 8,000 7,000 6,000 26,000
Raw materials per unit (grams)...... × 8 × 8 × 8 × 8 × 8
Production needs (grams)............. 40,000 64,000 56,000 48,000 208,000
Add desired ending inventory
(grams)....................................... 16,000 14,000 12,000 8,000 8,000
Total needs (grams)...................... 56,000 78,000 68,000 56,000 216,000
Less beginning inventory (grams).. 6,000 16,000 14,000 12,000 6,000
Raw materials to be purchased
(grams)....................................... 50,000 62,000 54,000 44,000 210,000
Cost of raw materials to be
purchased at $1.20 per gram...... $60,000 $74,400 $64,800 $52,800 $252,000
Accounts payable, beginning
balance....................................... $ 2,880 $ 2,880
1st Quarter purchases................... 36,000 $24,000 60,000
2nd Quarter purchases.................. 44,640 $29,760 74,400
3rd Quarter purchases................... 38,880 $25,920 64,800
4th Quarter purchases................... 31,680 31,680
Total cash disbursements for
materials..................................... $38,880 $68,640 $68,640 $57,600 $233,760

Problem 9-18 (continued)
2.
1
.
Zan Corporation
Direct Labor Budget
Required production (units)........... 5,000 8,000 7,000 6,000 26,000
Direct labor-hours per unit............. × 0.20 × 0.20 × 0.20 × 0.20 × 0.20
Total direct labor-hours needed..... 1,000 1,600 1,400 1,200 5,200
Direct labor cost per hour.............. × $11.50 × $11.50 × $11.50 × $11.50 × $11.50
Total direct labor cost.................... $ 11,500 $ 18,400 $ 16,100 $ 13,800 $ 59,800

1. Schedule of cash receipts:
Cash sales—May.................................................. $ 60,000
Collections on account receivable:
April 30 balance................................................. 54,000
May sales (50% × $140,000)............................. 70,000
Total cash receipts................................................ $184,000
Schedule of cash payments for purchases:
April 30 accounts payable balance....................... $ 63,000
May purchases (40% × $120,000)........................ 48,000
Total cash payments............................................. $111,000
Minden Company
Cash Budget
For the Month of May
Cash balance, beginning...................................... $ 9,000
Add receipts from customers (above)................... 184,000
Total cash available............................................... 193,000
Less disbursements:
Purchase of inventory (above)........................... 111,000
Selling and administrative expenses.................. 72,000
Purchases of equipment.................................... 6,500
Total cash disbursements..................................... 189,500
Excess of receipts over disbursements................ 3,500
Financing:
Borrowing—note................................................ 20,000
Repayments—note............................................ (14,500)
Interest............................................................... (100)
Total financing....................................................... 5,400
Cash balance, ending........................................... $ 8,900

2.
Minden Company
For the Month of May
Sales............................................................ $200,000
Cost of goods sold:
Beginning inventory.................................. $ 30,000
Add purchases.......................................... 120,000
Goods available for sale........................... 150,000
Ending inventory....................................... 40,000
Cost of goods sold....................................... 110,000
Gross margin............................................... 90,000
Selling and administrative expenses
($72,000 + $2,000)................................... 74,000
Net operating income................................... 16,000
Interest expense.......................................... 100
Net income.................................................. $ 15,900
3.
Minden Company
May 31
Assets
Cash............................................................................... $ 8,900
Accounts receivable (50% × $140,000)......................... 70,000
Inventory........................................................................ 40,000
Buildings and equipment, net of depreciation
($207,000 + $6,500 – $2,000)..................................... 211,500
Total assets.................................................................... $330,400
Liabilities and Equity
Accounts payable (60% × 120,000)............................... $ 72,000
Note payable.................................................................. 20,000
Capital stock................................................................... 180,000
Retained earnings ($42,500 + $15,900)......................... 58,400
Total liabilities and equity............................................... $330,400

1. a. The reasons that Marge Atkins and Pete Granger use budgetary
slack include the following:
• These employees are hedging against the unexpected (reducing
uncertainty/risk).
• The use of budgetary slack allows employees to exceed expectations
and/or show consistent performance. This is particularly important
when performance is evaluated on the basis of actual results versus
budget.
• Employees are able to blend personal and organizational goals
through the use of budgetary slack as good performance generally
leads to higher salaries, promotions, and bonuses.
b. The use of budgetary slack can adversely affect Atkins and Granger
by:
• limiting the usefulness of the budget to motivate their employees to
top performance.
• affecting their ability to identify trouble spots and take appropriate
corrective action.
• reducing their credibility in the eyes of management.
Also, the use of budgetary slack may affect management decision-
making as the budgets will show lower contribution margins (lower
sales, higher expenses). Decisions regarding the profitability of
product lines, staffing levels, incentives, etc., could have an adverse
effect on Atkins’ and Granger’s departments.

2. The use of budgetary slack, particularly if it has a detrimental effect on
the company, may be unethical. In assessing the situation, the specific
standards contained in “Standards of Ethical Conduct for Management
Accountants” that should be considered are listed below.
Competence
Clear reports using relevant and reliable information should be prepared.
Confidentiality
The standards of confidentiality do not apply in this situation.
Integrity
• Any activity that subverts the legitimate goals of the company should
be avoided.
• Favorable as well as unfavorable information should be
communicated.
Objectivity
• Information should be fairly and objectively communicated.
• All relevant information should be disclosed.
(Unofficial CMA Solution)

1. Schedule of expected cash collections:
Month
From accounts
receivable..................... $120,000 $ 16,000 $136,000
From April sales:
30% × $300,000........... 90,000 90,000
60% × $300,000........... 180,000 180,000
8% × $300,000............. $ 24,000 24,000
From May sales:
30% × $400,000........... 120,000 120,000
60% × $400,000........... 240,000 240,000
From June sales:
30% × $250,000........... 75,000 75,000
Total cash collections...... $210,000 $316,000 $339,000 $865,000

2. Cash budget:
Month
Cash balance,
beginning................... $ 24,000 $ 22,000 $ 26,000 $ 24,000
Add receipts:
Collections from
customers................ 210,000 316,000 339,000 865,000
Total available............... 234,000 338,000 365,000 889,000
Less disbursements:
Merchandise
purchases................ 140,000 210,000 160,000 510,000
Payroll........................ 20,000 20,000 18,000 58,000
Lease payments......... 22,000 22,000 22,000 66,000
Advertising................. 60,000 60,000 50,000 170,000
Equipment purchases — — 65,000 65,000
Total disbursements...... 242,000 312,000 315,000 869,000
receipts over
disbursements............ (8,000) 26,000 50,000 20,000
Financing:
Borrowings................. 30,000 — — 30,000
Repayments............... — — (30,000) (30,000)
Interest....................... — — (1,200) (1,200)
Total financing............... 30,000 — (31,200) (1,200)
Cash balance, ending... $ 22,000 $ 26,000 $ 18,800 $ 18,800
3. If the company needs a minimum cash balance of $20,000 to start each
month, the loan cannot be repaid in full by June 30. Some portion of the
loan balance will have to be carried over to July.

1. The budget at Springfield is an imposed “top-down” budget that fails to
consider both the need for realistic data and the human interaction
essential to an effective budgeting/control process. The President has
not given any basis for his goals, so one cannot know whether they are
realistic for the company. True participation of company employees in
preparation of the budget is minimal and limited to mechanical gathering
and manipulation of data. This suggests there will be little enthusiasm
for implementing the budget.
The sales by product line should be based on an accurate sales forecast
of the potential market. Therefore, the sales by product line should have
been developed first to derive the sales target rather than the reverse.
The initial meeting between the Vice President of Finance, Executive
Vice President, Marketing Manager, and Production Manager should
have been held earlier. This meeting was held too late in the budget
process.
2. Springfield should consider adopting a “bottom-up” budget process. This
means that the people responsible for performance under the budget
would participate in the decisions by which the budget is established. In
addition, this approach requires initial and continuing involvement of
sales, financial, and production personnel to define sales and profit
goals that are realistic within the constraints under which the company
operates. Although time consuming, the approach should produce a
more acceptable, honest, and workable goal-control mechanism.
The sales forecast should be developed considering internal sales-
forecasts as well as external factors. Costs within departments should
be divided into fixed and variable, controllable and noncontrollable,
discretionary and nondiscretionary. Flexible budgeting techniques could
then allow departments to identify costs that can be modified in the
planning process.

3. The functional areas should not necessarily be expected to cut costs
when sales volume falls below budget. The time frame of the budget
(one year) is short enough so that many costs are relatively fixed. For
costs that are fixed, there is little hope for a reduction as a consequence
of short-run changes in volume. However, the functional areas should be
expected to cut costs should sales volume fall below target when:
a. control is exercised over the costs within their function.
b. budgeted costs were more than adequate for the originally targeted
sales, i.e., slack was present.
c. budgeted costs vary to some extent with changes in sales.
d. there are discretionary costs that can be delayed or omitted with no
serious effect on the department.
(Adapted unofficial CMA Solution)

Month
July August
Septembe
r Quarter
From accounts receivable:
May sales
$250,000 × 3%.......... $ 7,500 $ 7,500
June sales
$300,000 × 70%........ 210,000 210,000
$300,000 × 3%.......... $ 9,000 9,000
From budgeted sales:
July sales
$400,000 × 25%........ 100,000 100,000
$400,000 × 70%........ 280,000 280,000
$400,000 × 3%.......... $ 12,000 12,000
August sales
$600,000 × 25%........ 150,000 150,000
$600,000 × 70%........ 420,000 420,000
September sales
$320,000 × 25%........ 80,000 80,000
Total cash collections...... $317,500 $439,000 $512,000 $1,268,500

2. Cash budget:
Month
July August
Septem-
ber Quarter
Cash balance, beginning.. $ 44,500 $ 28,000 $ 23,000 $ 44,500
Add receipts:
Collections from
customers................... 317,500 439,000 512,000 1,268,500
Total cash available.......... 362,000 467,000 535,000 1,313,000
Less disbursements:
Merchandise purchases 180,000 240,000 350,000 770,000
Salaries and wages....... 45,000 50,000 40,000 135,000
Advertising..................... 130,000 145,000 80,000 355,000
Rent payments.............. 9,000 9,000 9,000 27,000
Equipment purchases.... 10,000 0 0 10,000
Total disbursements......... 374,000 444,000 479,000 1,297,000
receipts over
disbursements............... (12,000) 23,000 56,000 16,000
Financing:
Borrowings..................... 40,000 0 0 40,000
Repayments.................. 0 0 (40,000) (40,000)
Interest........................... 0 0 (1,200) (1,200)
Total financing.................. 40,000 0 (41,200) (1,200)
Cash balance, ending....... $ 28,000 $ 23,000 $ 14,800 $ 14,800
3. If the company needs a $20,000 minimum cash balance to start each
month, then the loan cannot be repaid in full by September 30. If the
loan is repaid in full, the cash balance will drop to $14,800 on
September 30, as shown above. Some portion of the loan balance will
have to be carried over to October.

1. Collections on sales:
Cash sales....................... $120,000 $180,000 $100,000 $ 400,000
Sales on account:
February: $200,000 ×
80% × 20%................ 32,000 32,000
March: $300,000 ×
80% × 70%, 20%....... 168,000 48,000 216,000
April: $600,000 × 80%
× 10%, 70%, 20%...... 48,000 336,000 96,000 480,000
May: $900,000 × 80%
× 10%, 70%............... 72,000 504,000 576,000
June: $500,000 × 80%
× 10%......................... 40,000 40,000
Total cash collections...... $368,000 $636,000 $740,000 $1,744,000
2. a. Merchandise purchases budget:
April May June July
Budgeted cost of goods sold... $420,000 $630,000 $350,000 $280,000
Add desired ending inventory* 126,000 70,000 56,000
Total needs.............................. 546,000 700,000 406,000
Less beginning inventory........ 84,000 126,000 70,000
Required inventory purchases $462,000 $574,000 $336,000
*20% of the next month’s budgeted cost of goods sold.
b. Schedule of expected cash disbursements for merchandise
purchases:
Accounts payable,
March 31.............. $126,000 $ 126,000
April purchases....... 231,000 $231,000 462,000
May purchases....... 287,000 $287,000 574,000
June purchases...... 168,000 168,000
Total cash
disbursements...... $357,000 $518,000 $455,000 $1,330,000

3.
Garden Sales, Inc.
Cash Budget
For the Quarter Ended June 30
Cash balance, beginning.... $ 52,000 $ 40,000 $ 40,000 $ 52,000
Add collections from sales.. 368,000 636,000 740,000 1,744,000
Total cash available............ 420,000 676,000 780,000 1,796,000
Less disbursements:
Purchases for inventory... 357,000 518,000 455,000 1,330,000
Selling expenses.............. 79,000 120,000 62,000 261,000
Administrative expenses.. 25,000 32,000 21,000 78,000
Land purchases............... — 16,000 — 16,000
Dividends paid................. 49,000 — — 49,000
Total disbursements......... 510,000 686,000 538,000 1,734,000
Excess (deficiency) of cash (90,000) (10,000) 242,000 62,000
Financing:
Borrowings....................... 130,000 50,000 0 180,000
Repayments..................... 0 0 (180,000) (180,000)
Interest
($130,000 × 1% × 3 +
$50,000 × 1% × 2)........ 0 0 (4,900) (4,900)
Total financing..................... 130,000 50,000 (184,900) (4,900)
Cash balance, ending......... $ 40,000 $ 40,000 $ 57,100 $ 57,100

Cash sales..................... $36,000 * $43,200 $54,000 $133,200
Credit sales1
................... 20,000 * 24,000 28,800 72,800
Total collections............. $56,000 * $67,200 $82,800 $206,000
1
40% of the preceding month’s sales.
*Given.
2. Merchandise purchases budget:
Budgeted cost of goods
sold1
............................. $45,000 * $ 54,000 * $67,500 $166,500
Add desired ending
inventory2
..................... 43,200 * 54,000 28,800 28,800
Total needs...................... 88,200 * 108,000 96,300 195,300
Less beginning inventory 36,000 * 43,200 54,000 36,000
Required purchases........ $52,200 * $ 64,800 $42,300 $159,300
1
For April sales: $60,000 sales × 75% cost ratio = $45,000.
2
At April 30: $54,000 × 80% = $43,200.
At June 30: July sales $48,000 × 75% cost ratio × 80% = $28,800.
*Given.
Schedule of expected cash disbursements—merchandise purchases
March purchases............ $21,750 * $ 21,750 *
April purchases............... 26,100 * $26,100 * 52,200 *
May purchases................ 32,400 $32,400 64,800
June purchases............... 21,150 21,150
Total disbursements........ $47,850 * $58,500 $53,550 $159,900
*Given.

3. Schedule of expected cash disbursements—selling and administrative
expenses
Commissions................ $ 7,200 * $ 8,640 $10,800 $26,640
Rent.............................. 2,500 * 2,500 2,500 7,500
Other expenses............ 3,600 * 4,320 5,400 13,320
Total disbursements..... $13,300 * $15,460 $18,700 $47,460
*Given.
4. Cash budget:
Cash balance,
beginning.................. $ 8,000 * $ 4,350 $ 4,590 $ 8,000
Add cash collections... 56,000 * 67,200 82,800 206,000
Total cash available..... 64,000 * 71,550 87,390 214,000
Less disbursements:
For inventory............ 47,850 * 58,500 53,550 159,900
For expenses............ 13,300 * 15,460 18,700 47,460
For equipment.......... 1,500 * 0 0 1,500
Total disbursements.... 62,650 * 73,960 72,250 208,860
cash.......................... 1,350 * (2,410) 15,140 5,140
Financing:
Borrowings............... 3,000 7,000 0 10,000
Repayments............. 0 0 (10,000) (10,000)
Interest ($3,000 × 1%
× 3 + $7,000 × 1%
× 2)........................ 0 0 (230) (230)
Total financing............. 3,000 7,000 (10,230) (230)
Cash balance, ending. $ 4,350 $ 4,590 $ 4,910 $ 4,910
* Given.

5.
Shilow Company
Income Statement
For the Quarter Ended June 30
Sales ($60,000 + $72,000 + $90,000)......... $222,000
Cost of goods sold:
Beginning inventory (Given)...................... $ 36,000
Add purchases (Part 2)............................. 159,300
Goods available for sale........................... 195,300
Ending inventory (Part 2).......................... 28,800 166,500 *
Gross margin............................................... 55,500
Selling and administrative expenses:
Commissions (Part 3)............................... 26,640
Rent (Part 3)............................................. 7,500
Depreciation ($900 × 3)............................ 2,700
Other expenses (Part 3)............................ 13,320 50,160
Interest expense (Part 4)............................. 230
Net income.................................................. $ 5,110
*A simpler computation would be: $222,000 × 75% = $166,500.

6.
Shilow Company
Balance Sheet
June 30
Assets
Current assets:
Cash (Part 4).................................................................. $ 4,910
Accounts receivable ($90,000 × 40%)............................ 36,000
Inventory (Part 2)............................................................ 28,800
Total current assets........................................................... 69,710
Building and equipment—net
($120,000 + $1,500 – $2,700)........................................ 118,800
Total assets....................................................................... $188,510
Accounts payable (Part 2: $42,300 × 50%).. $ 21,150
Stockholders’ equity:
Capital stock (Given)................................. $150,000
Retained earnings*.................................... 17,360 167,360
Total liabilities and equity............................. $188,510
* Retained earnings, beginning................... $12,250
Add net income........................................ 5,110
Retained earnings, ending....................... $17,360

1. The sales budget for the third quarter:
Month
July August September Quarter
Budgeted sales in
units.......................... 30,000 70,000 50,000 150,000
Selling price per unit.... × $12 × $12 × $12 × $12
Budgeted sales............ $360,000 $840,000 $600,000 $1,800,000
The schedule of expected cash collections from sales:
Accounts receivable,
June 30:
$300,000 × 65%....... $195,000 $ 195,000
July sales:
$360,000 × 30%,
65%.......................... 108,000 $234,000 342,000
August sales:
$840,000 × 30%,
65%.......................... 252,000 $546,000 798,000
September sales:
$600,000 × 30%....... 180,000 180,000
Total cash collections. . $303,000 $486,000 $726,000 $1,515,000
2. The production budget for July-October:
July August September October
Budgeted sales in units........... 30,000 70,000 50,000 20,000
Add desired ending inventory. 10,500 7,500 3,000 1,500
Total needs.............................. 40,500 77,500 53,000 21,500
Less beginning inventory........ 4,500 10,500 7,500 3,000
Required production................ 36,000 67,000 45,500 18,500

3. The direct materials budget for the third quarter:
Month
July August
Septembe
r Quarter
Required production
(above)....................... 36,000 67,000 45,500 148,500
Raw material needs per
unit (feet).................... × 4 × 4 × 4 × 4
Production needs (feet). 144,000 268,000 182,000 594,000
Add desired ending
inventory (feet)........... 134,000 91,000 37,000 * 37,000 *
Total needs (feet).......... 278,000 359,000 219,000 631,000
Less beginning
inventory (feet)........... 72,000 134,000 91,000 72,000
Raw materials to be
purchased (feet)......... 206,000 225,000 128,000 559,000
Cost of raw materials to
be purchased at
$0.80 per foot............. $164,800 $180,000 $102,400 $447,200
*18,500 units (October) × 4 feet per unit = 74,000 feet
74,000 feet × ½ = 37,000 feet
The schedule of expected cash payments:
July August
Septembe
r Quarter
Accounts payable,
June 30......................... $ 76,000 $ 76,000
July purchases:
$164,800 × 50%, 50%... 82,400 $ 82,400 164,800
August purchases:
$180,000 × 50%, 50%... 90,000 $ 90,000 180,000
September purchases:
$102,400 × 50%............ 51,200 51,200
Total cash payments........ $158,400 $172,400 $141,200 $472,000

January February March Quarter
Cash sales.................... $ 80,000 * $120,000 $ 60,000 $ 260,000
Credit sales.................. 224,000 * 320,000 480,000 1,024,000
Total cash collections... $304,000 * $440,000 $540,000 $1,284,000
*Given.
2. a. Merchandise purchases budget:
Budgeted cost of
goods sold1
............ $240,000 * $360,000 * $180,000 $780,000
Add desired ending
inventory2
............... 90,000 * 45,000 30,000 30,000
Total needs............. 330,000 * 405,000 210,000 810,000
Less beginning
inventory................ 60,000 * 90,000 45,000 60,000
Required purchases.. $270,000 * $315,000 $165,000 $750,000
1
For January sales: $400,000 × 60% cost ratio = $240,000.
2
At January 31: $360,000 × 25% = $90,000. At March 31: $200,000
April sales × 60% cost ratio × 25% = $30,000.
*Given.
b. Schedule of expected cash disbursements for purchases:
December
purchases............. $ 93,000 * $ 93,000 *
January purchases.. 135,000 * $135,000 * 270,000 *
February purchases 157,500 $157,500 315,000
March purchases.... 82,500 82,500
Total cash
disbursements for
purchases............. $228,000 * $292,500 $240,000 $760,500
*Given.

3. Schedule of expected cash disbursements for selling and administrative
expenses:
Salaries and wages...... $ 27,000 * $ 27,000 $ 27,000 $ 81,000
Advertising.................... 70,000 * 70,000 70,000 210,000
Shipping....................... 20,000 * 30,000 15,000 65,000
Other expenses............ 12,000 * 18,000 9,000 39,000
Total cash disburse-
ments for selling and
administrative
expenses................... $129,000 * $145,000 $121,000 $395,000
*Given.
4. Cash budget:
Cash balance, beginning.... $ 48,000 * $ 30,000 $ 30,800 $ 48,000
Add cash collections........... 304,000 * 440,000 540,000 1,284,000
Total cash available............ 352,000 * 470,000 570,800 1,332,000
Less cash disbursements:
Inventory purchases........ 228,000 * 292,500 240,000 760,500
Selling and administrative
expenses...................... 129,000 * 145,000 121,000 395,000
Equipment purchases...... 0 1,700 84,500 86,200
Cash dividends................ 45,000 * 0 0 45,000
Total cash disbursements... 402,000 * 439,200 445,500 1,286,700
Excess (deficiency) of cash (50,000)* 30,800 125,300 45,300
Financing:
Borrowings....................... 80,000 0 0 80,000
Repayments.................... 0 0 (80,000) (80,000)
Interest
($80,000 × 1% × 3)....... 0 0 (2,400) (2,400)
Total financing.................... 80,000 0 (82,400) (2,400)
* Given.

5. Income statement:
Hillyard Company
Income Statement
For the Quarter Ended March 31
Sales............................................................ $1,300,000
Cost of goods sold:
Beginning inventory (Given)...................... $ 60,000
Add purchases (Part 2).............................. 750,000
Goods available for sale............................ 810,000
Ending inventory (Part 2)........................... 30,000 780,000 *
Gross margin................................................ 520,000
Selling and administrative expenses:
Salaries and wages (Part 3)...................... 81,000
Advertising (Part 3).................................... 210,000
Shipping (Part 3)........................................ 65,000
Depreciation (given).................................. 42,000
Other expenses (Part 3)............................ 39,000 437,000
Interest expense (Part 4).............................. 2,400
Net income................................................... $ 80,600
*A simpler computation would be: $1,300,000 x 60% = $780,000.

6. Balance sheet:
Hillyard Company
Balance Sheet
March 31
Assets
Current assets:
Cash (Part 4).................................................................... $ 42,900
Accounts receivable (80% × $300,000)........................... 240,000
Inventory (Part 2)............................................................. 30,000
Total current assets............................................................. 312,900
Buildings and equipment, net
($370,000 + $86,200 – $42,000)...................................... 414,200
Total assets......................................................................... $727,100
Current liabilities:
Accounts payable (Part 2: 50% × $165,000)... $ 82,500
Stockholders’ equity:
Capital stock.................................................... $500,000
Retained earnings*.......................................... 144,600 644,600
Total liabilities and equity.................................... $727,100
* Retained earnings, beginning................. $109,000
Add net income....................................... 80,600
Total........................................................ 189,600
Deduct cash dividends............................ 45,000
Retained earnings, ending...................... $144,600

Case 9-29 (45 minutes)
1. The budgetary control system has several important shortcomings that
reduce its effectiveness and may cause it to interfere with good
performance. Some of the shortcomings are explained below.
a. Lack of Coordinated Goals. Emory had been led to believe high-
quality output is the goal; it now appears low cost is the goal.
Employees do not know what the goals are and thus cannot make
decisions that further the goals.
b. Influence of Uncontrollable Factors. Actual performance relative to
budget is greatly influenced by uncontrollable factors (i.e., rush
orders, lack of prompt maintenance). Thus, the variance reports serve
little purpose for performance evaluation or for locating controllable
factors to improve performance. As a result, the system does not
encourage coordination among departments.
c. The Short-Run Perspectives. Monthly evaluations and budget
tightening on a monthly basis results in a very short-run perspective.
This results in inappropriate decisions (i.e., inspect forklift trucks
rather than repair inoperative equipment, fail to report supplies
usage).
d. System Does Not Motivate. The budgetary system appears to focus
on performance evaluation even though most of the essential factors
for that purpose are missing. The focus on evaluation and the
weaknesses take away an important benefit of the budgetary system
—employee motivation.
2. The improvements in the budgetary control system should correct the
deficiencies described above. The system should:
a. more clearly define the company’s objectives.
b. develop an accounting reporting system that better matches
controllable factors with supervisor responsibility and authority.
c. establish budgets for appropriate time periods that do not change
monthly simply as a result of a change in the prior month’s
performance.
The entire company from top management down should be educated in
sound budgetary procedures.
(Unofficial CMA Solution, adapted)

Case 9-30 (120 minutes)
1.
a. Sales budget:
Budgeted unit sales.... 65,000 100,000 50,000 215,000
Selling price per unit... × $10 × $10 × $10 × $10
Total sales.................. $650,000 $1,000,000 $500,000 $2,150,000
b. Schedule of expected cash collections:
February sales (10%). $ 26,000 $ 26,000
March sales
(70%, 10%).............. 280,000 $ 40,000 320,000
April sales
(20%, 70%, 10%).... 130,000 455,000 $ 65,000 650,000
May sales
(20%, 70%).............. 200,000 700,000 900,000
June sales (20%)....... 100,000 100,000
Total cash collections. $436,000 $695,000 $865,000 $1,996,000
c. Merchandise purchases budget:
Budgeted unit sales.... 65,000 100,000 50,000 215,000
Add desired ending
inventory (40% of
the next month’s
unit sales)................ 40,000 20,000 12,000 12,000
Total needs................. 105,000 120,000 62,000 227,000
Less beginning
inventory.................. 26,000 40,000 20,000 26,000
Required purchases... 79,000 80,000 42,000 201,000
Cost of purchases at
$4 per unit............... $316,000 $320,000 $168,000 $ 804,000
d. Budgeted cash disbursements for merchandise purchases:
Accounts payable........ $100,000 $ 100,000
April purchases............ 158,000 $158,000 316,000
May purchases............ 160,000 $160,000 320,000
June purchases........... 84,000 84,000
Total cash payments.... $258,000 $318,000 $244,000 $ 820,000

Case 9-30 (continued)
2. Earrings Unlimited
Cash Budget
For the Three Months Ending June 30
Cash balance..................... $ 74,000 $ 50,000 $ 50,000 $ 74,000
Add collections from
customers........................ 436,000 695,000 865,000 1,996,000
Total cash available............ 510,000 745,000 915,000 2,070,000
Less disbursements:
Merchandise purchases. . 258,000 318,000 244,000 820,000
Advertising....................... 200,000 200,000 200,000 600,000
Rent................................. 18,000 18,000 18,000 54,000
Salaries............................ 106,000 106,000 106,000 318,000
Commissions (4% of
sales)............................ 26,000 40,000 20,000 86,000
Utilities............................. 7,000 7,000 7,000 21,000
Equipment purchases...... 0 16,000 40,000 56,000
Dividends paid................. 15,000 0 0 15,000
Total disbursements........... 630,000 705,000 635,000 1,970,000
receipts over
disbursements................. (120,000) 40,000 280,000 100,000
Financing:
Borrowings....................... 170,000 10,000 0 180,000
Repayments.................... 0 0 (180,000) (180,000)
Interest
($170,000 × 1% × 3 +
$10,000 × 1% × 2)........ 0 0 (5,300) (5,300)
Total financing.................... 170,000 10,000 (185,300) (5,300)

For the Three Months Ended June 30
Sales (Part 1 a.).......................................... $2,150,000
Variable expenses:
Cost of goods sold @ $4 per unit............. $860,000
Commissions @ 4% of sales................... 86,000 946,000
Contribution margin..................................... 1,204,000
Fixed expenses:
Advertising ($200,000 × 3)....................... 600,000
Rent ($18,000 × 3)................................... 54,000
Salaries ($106,000 × 3)............................ 318,000
Utilities ($7,000 × 3)................................. 21,000
Insurance ($3,000 × 3)............................. 9,000
Depreciation ($14,000 × 3)....................... 42,000 1,044,000
Net operating income.................................. 160,000
Interest expense (Part 2)............................ 5,300
Net income.................................................. $ 154,700

June 30
Assets
Cash................................................................................... $ 94,700
Accounts receivable (see below)........................................ 500,000
Inventory (12,000 units @ $4 per unit)................................ 48,000
Prepaid insurance ($21,000 – $9,000)................................ 12,000
Property and equipment, net
($950,000 + $56,000 – $42,000)...................................... 964,000
Total assets......................................................................... $1,618,700
Liabilities and Stockholders’ Equity
Accounts payable, purchases (50% × $168,000)............... $ 84,000
Dividends payable.............................................................. 15,000
Capital stock....................................................................... 800,000
Retained earnings (see below)........................................... 719,700
Total liabilities and stockholders’ equity.............................. $1,618,700
Accounts receivable at June 30:
10% × May sales of $1,000,000............. $100,000
80% × June sales of $500,000............... 400,000
Total....................................................... $500,000
Retained earnings at June 30:
Balance, March 31................................. $580,000
Add net income (part 3)......................... 154,700
Total....................................................... 734,700
Less dividends declared........................ 15,000
Balance, June 30................................... $719,700

Research and Application 9-31
1. Procter & Gamble (P&G) succeeds first and foremost because of its
product leadership customer value proposition. Page 26 of the annual
report says that P&G succeeds by winning two “moments of truth.” First,
P&G must win the moment of truth “when a consumer stands in front of
the shelf and chooses a product from among many competitive
offerings.” This moment of truth alludes to a dimension of product
leadership called perceived quality, or brand recognition. P&G must also
win the second moment of truth “when the consumer uses the product
and evaluates how well the product meets his or her expectations.” This
moment of truth alludes to the actual functionality of the product. If P&G
cannot win these two “moments of truth” all other dimensions of
competitiveness are moot.
Students can make defensible arguments in favor of customer intimacy
and operational excellence. For example, the Market Development
Organization (MDO) operates in over 80 countries in an effort to tailor
P&G’s brands to local consumer preferences. However, these customer
intimacy efforts are targeted at fairly large customer segments.
Companies that succeed primarily because of customer intimacy tailor
their offerings to individual customers, not large customer segments.
P&G also cites economies of scale as being important to its success.
While this is certainly true, scale does not differentiate P&G from its
major competitors. What differentiates P&G from its competitors is the
leadership position of its 17 “billion dollar brands.”
2. P&G faces numerous business risks, some of which are described on
page 28 and throughout the annual report. Students may mention other
risks beyond those specifically mentioned in the annual report. Here are
four risks faced by P&G with suggested control activities:
• Risk: Patents granted to competitors may introduce product
innovations that threaten P&G’s product leadership position. Control
activity: Create a competitive intelligence department that legally
gathers information about the plans and actions of competitors.
• Risk: One customer, Wal-Mart, accounted for 16% of P&G’s sales in
2005 (see page 60 of the annual report). Control activity: Seek to
diversify sources of sales revenue. P&G appears to be doing this
because Wal-Mart was responsible for 17% and 18% of P&G’s sales
in 2004 and 2003, respectively.

Research and Application 9-31 (continued)
• Risk: P&G’s pipeline of product innovations will dissipate, thereby
threatening the company’s product leadership position. Control
activities: Invest generously in research & development and create
performance measures that monitor the number of patents generated
per dollar of investment.
• Risk: Globalization efforts may fail to grow sales. Page 7 of the
annual report mentions that P&G currently generates only 23% of its
sales from countries that comprise 86% of the world’s population.
Control activities: Continue to invest in the Market Development
Organization and ask it to survey customers in target markets to
ensure a good fit between P&G products and local consumer tastes.
3. P&G’s quarterly sales (in millions) for 2005 were as follows: September
30th
, $13,744; December 31st
, $14,452; March 31st
, $14,287; and June
30th
, $14,258. Federated Department Stores had quarterly sales (in
millions) in 2004 of: March 31st
, $3,517; June 30th
, $3,548; September
30th
, $3,491; and December 31st
, $5,074. P&G’s quarterly sales trend is
relatively smooth, whereas Federated’s sales spiked upward in the
fourth quarter.
Federated has strong sales during the year-end holiday season,
whereas P&G sells products that are daily essentials—Crest, Bounty,
Charmin, Downy, and Folgers are used by consumers 365 days a year.
Generally speaking, companies with seasonal customer demand will
have greater cash budgeting concerns. These companies need to have
enough cash available to buy large amounts of inventory even though
the related cash inflows may not be received for months.
4. The “Item 2: Properties” section of P&G’s 10-K states that the company
operates 33 manufacturing plants in 21 different states in the United
States. P&G also operates 91 manufacturing facilities in 42 other
countries.
P&G’s three Global Business Units (GBUs) include P&G Beauty, P&G
Family Health, and P&G Household Care. P&G Beauty includes five of
the company’s billion dollar brands—Pantene, Olay, Head & Shoulders,
Wella, and Always. P&G Family Health includes six of the company’s
billion dollar brands—Pampers, Charmin, Bounty, Crest, Actonel, and

Research and Application 9-31 (continued)
Iams. P&G Household Care includes the remaining six billion dollar
brands—Folgers, Downy, Tide, Pringles, Dawn, and Ariel. Page 25 of
the annual report mentions that P&G markets a total of over 300
branded products in more than 160 countries. The company’s Market
Development Organization operates in 80 countries.
5. Numerous uncertainties discussed on page 28 of the annual report
complicate P&G’s forecasting process. These include: (1) raw material
cost fluctuations, (2) competitor advertising, pricing and promotion
decisions, (3) global economic and political conditions, (4) changes in
the regulatory environment, and (5) unforeseen difficulties integrating
acquisitions such as Wella and Gillette.
6. Differences in budgeting practices could definitely create cultural
differences in terms of accountability and internal communication. For
example, if one company uses inflexible and non-negotiable budget
targets to blame and punish its employees it would create a counter-
productive culture of accountability. This would stand in stark contrast to
a company that uses budgets to plan, coordinate, and improve its
operations, rather than to assign blame.
Furthermore, a “top-down” approach to budgeting would create a
different cultural environment in terms of internal communication than a
“bottom-up” participative approach to budgeting. The “top-down”
approach would create a sub-optimal environment of one-way
communication where the knowledge of those closest to the customer is
disregarded. The “bottom-up” approach would empower subordinates to
improve the quality of the budget by sharing their knowledge while at the
same time recognizing the need for strategic oversight from senior
managers.

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